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It may seem like getting startup financing is out of reach, but there are lots of options, such as alternative lenders, the SBA, business credit cards, and more.
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Most new small business owners and entrepreneurs need a business loan to get their new business started. However, most business lenders are unwilling to lend to startup businesses without consistent revenues and at least a year or two in business (and good credit, to boot).
The best small business loans for startups and entrepreneurs are out there, but they can be tough to find. This post outlines some of the best funding options, including the benefits, drawbacks, and what to know before you apply.
Table of Contents
Entrepreneurs and startups face a few serious obstacles to getting funded, with the biggest issue being risk.
Unfortunately, over 50% of startups fail. Traditional lenders see this high level of risk and are less willing to lend to new businesses. This means that you will have a smaller pool of lenders than is available to established businesses right from the start.
An additional hurdle is that bank consolidation has resulted in fewer traditional lenders, which means fewer funding opportunities. The loss of community banks, in particular, has negatively impacted lending. Online lenders have partially stepped into the void of loans for startups, but many are focused on very short-term lending.
In particular, the high-growth startup model (though much romanticized in the media) is rarer than you might think. Fewer than 1% of businesses successfully raise venture capital.
Finally, social barriers ranging from prejudiced lending practices to geographic concentration of resources can greatly affect your chances of getting financing.
That said, “difficult” doesn’t mean “impossible.”
With some creativity, diligence, and relationship-building, you’ll have a good shot at overcoming the odds.
Here’s a breakdown of various types of funding that may be available to kickstart your business.
| Funding Type | What It Is |
|---|---|
| Microloans | Installment loans of $50,000 or less |
| Personal Loans | Loans in which the borrower’s eligibility is based on their personal profile, not the business profile |
| Lines Of Credit | Flexible financing that allows you to draw funds as needed |
| Equipment Financing | Loans and leases used to purchase equipment |
| Business Credit Cards | Credit lines for everyday business expenses |
| SBA Loans | Low-cost loans offered by the Small Business Administration and its partners |
| Crowdfunding | Financing in which the funds are sourced from a pool of investors or backers |
| Invoice Financing | Financing in which the business’s unpaid invoices are leveraged to obtain working capital |
| Small Business Grants | While not a loan, a business grant is money awarded to an eligible business that does not have to be repaid |
| Friends & Family | Financing sourced from the borrower’s friends and family |
| Venture Capital | Investments from venture capital firms that collect money from wealthy investors |
| Angel Investors | Similar to VC, angel investors are investors willing to invest capital in exchange for equity |
| Bootstrapping | The use of your own savings and resources to fund your startup |
Microloans are smaller loans that provide up to $50,000 for small businesses and startups. Microloans can generally be used for any business purpose — such as supplies, inventory, or working capital — although specific lenders may have certain restrictions in place.
The Small Business Administration’s Microloans program is a very popular choice for small business owners. This program is open to any startup or business that fits the definition of a small business set by the SBA, which limits the number of employees, annual revenues, and net worth of a business.
For-profit businesses and nonprofit childcare centers located in the U.S. are eligible to apply. Loans of up to $50,000 with repayment terms of up to six years are available through nonprofit intermediary lenders. The average microloan given by SBA intermediaries is $13,000.
Other nonprofit organizations also offer microloans. Repayment terms and maximum borrowing amounts vary by lender.
When applying for a business loan through a bank or other conventional lender, both personal and business information will be considered, including personal credit score, business credit score, and annual business revenues.
To bypass these requirements, business owners with high personal credit scores can apply for a personal loan from a bank or credit union, while businesses that don’t meet these stringent requirements may qualify through an alternative lender. The credit history and income of the applicant — not the business — will be considered when applying for a personal loan.
A line of credit is a flexible form of financing that is best for businesses that don’t need a lump sum of cash for a larger purchase. Once approved, a borrower can draw from the line as needed (up to the assigned credit limit) to cover expenses. This is a great option for emergency expenses, purchasing supplies or inventory, or for use as working capital.
If a line of credit is revolving, funds are replenished as payments are made. Interest for lines of credit is only charged on borrowed funds — not the total assigned credit limit.
An equipment loan is a loan that is used to finance long-term equipment, such as machinery, industrial kitchen appliances, or a commercial vehicle. This type of financing allows business owners to purchase expensive equipment through affordable monthly payments instead of paying the full cost upfront.
Equipment leases are also available. These differ from loans in that you can either trade in the equipment for upgraded models at the end of your lease, or you can pay off the balance (or take advantage of special lease programs) to purchase the equipment when your lease term ends.
Business credit cards work just like personal credit cards. The lender provides a set credit limit, and you can use your card up to and including that credit limit to pay merchants, vendors, suppliers, and other business expenses.
The Small Business Administration doesn’t just offer microloans. In fact, the SBA has several loan programs to help startups get the funding they need. This includes:
For all programs, applicants must be a small business as defined by the SBA and can apply for these loans through an SBA intermediary lender. Applicants should have a solid credit score in the high 600s and no bankruptcies, foreclosures, or past defaults on government loans.
Crowdfunding equity sites are a relatively new type of business financing, but they are growing in popularity, especially among startups.
With this type of loan, you pitch your idea on a crowdfunding platform. Through this platform, you can reach investors and others who believe in your business and are willing to invest their money to help you get your idea off the ground.
If your new business has a shortage of capital due to unpaid invoices, invoice financing or invoice factoring may be an option to consider. Here’s a breakdown of the differences between the two:
| Invoice Financing | Invoice Factoring |
|---|---|
| Uses invoices as collateral for a line of credit | Sell invoices to a factor for immediate cash |
| You are granted a credit facility based on the value of your unpaid invoices and can draw from your available funds at any time | The factor gives you an advance when the invoice is sent and sends you the rest once the customer pays (minus a factoring fee) |
| You are responsible for collecting invoice payments | The factor is responsible for collecting invoice payments |
Whether you choose invoice financing or invoice factoring, this type of funding provides payment for your unpaid invoices to resolve short-term cash flow issues.
Small business grants aren’t loans. Instead, this is funding that is awarded to eligible businesses. The great thing about grants is that they do not have to be repaid.
Grants are available through state and local governments, the federal government, nonprofits, and private organizations. Grants may be available to specific industries, demographics (i.e., businesses owned by women or minorities), or to businesses in certain regions.
To get your startup off the ground, you may turn to an investor you already know: a friend or family member. Just because you know them, though, doesn’t mean that you should just expect them to lend to you.
Instead, you should be prepared with a presentation similar to what you would give a bank to let your friend or family member know why they should place their bets on your business. Make sure everything is in writing and treat the business relationship just as you would with a formal lender.
Venture capital firms pool money from sources ranging from wealthy individuals to banks to pension funds. Each firm tends to specialize in a particular industry or type of company. Once they’ve raised an agreed-upon amount, they’ll shop around for businesses in which to invest.
A venture capital fund frequently disburses its funding over several “rounds,” starting with the seed round and rolling into successive rounds (also called a series). Those rounds include:
Different venture capital firms tend to specialize in specific phases.
Whereas venture capital usually involves a firm aggregating funds from multiple sources, an angel investor is an individual — one who is typically wealthy — who is looking for a risky venture with a potentially high rate of return. Like a venture capital firm, an angel investor is usually looking for equity in your company in exchange for funds.
While word-of-mouth is still a common way to get hooked up with an angel investor, over the past decade or so there have been attempts to form networks of investors through hubs. Some angel investors even pool their resources and function like a venture capital firm.
One strategy to consider is to use your savings and resources instead of using outside sources for capital. This strategy typically requires taking a lean, minimalist approach to your business operations. When you do hit a growth phase, it’ll be funded by your business’s revenue.
Ready to apply for a startup loan for your business? Before you apply, there are a few steps you should take to ensure you’re ready to receive your funds.
Choosing the best small business startup loans requires a bit of time and patience. Getting a business loan for your startup may take research and a few additional steps, but don’t let a closed door leave you feeling defeated.
Understand the types of loans to pursue, pick the ones that make the most sense for your small business, and you’ll soon be on your way to receiving the business loan you need.
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